WWE may have known for several weeks or months that they were going to release Dakota Kai.
Dave Meltzer reported today that the decision to let her go was made after several dark match tryouts and management didn't see her as main roster material.
Kai's first appearances in NXT happened in 2015 under the name Evie before signing a contract in late 2016. A few months later, she was announced as a participant in the Mae Young Classic. Her tenure in NXT worked against her because the idea is to not have people stick around for several years. Meltzer noted that there was nothing left for her and she didn't fit in anymore even though she's a good wrestler. It was also noted that WWE has their "visions about women."
Last August, Kai was put in a dark match before SmackDown against Aliyah. She wrestled in several more dark matches through the end of the year and one more in January of this year. She lost several matches this year on NXT TV before reuniting with Raquel Rodriguez and beating Toxic Attraction for the Women's Tag Team Titles at Stand & Deliver. Kai and Rodriguez lost the belts days later on TV and then Rodriguez was moved up to SmackDown.
Fightful reported today that Kai had planned not to sign a new deal so the feeling was mutual about her departure.